As accounting standard setters consider the creation of a “disclosure framework” to make financial reporting disclosures more effective, CFA Institute has contributed to the debate by publishing a report examining how investors — the main consumers of financial statements — view the effectiveness of current financial disclosures and how they could be enhanced.

Investors’ perceptions regarding financial reporting effectiveness have been profoundly affected by experiences leading up to, during, and in the aftermath of the 2008 financial crisis. Investors believe the financial crisis — and the five years of economic uneasiness that have followed — clearly shows the insufficiency of disclosures. Investors point to high-profile financial institution failures and bailouts in which transparency on exposures, risks, uncertainties, and leverage was clearly lacking. As noted in a recent blog post, 69% of investors who responded to a survey conducted by the Association of Chartered Certified Accountants say they are more skeptical about the information companies provide since the financial crisis.

Lack of transparency in financial reporting, especially when it occurs in financial institutions, has implications for investor trust. And without trust in financial institutions — the handmaiden to the broader economy — investment can lag in the broader economy.

Therefore disclosure reform proposals should demonstrate how they would improve the types of disclosures that were most problematic during the financial crisis (undisclosed risks, judgments and estimates, off-balance-sheet items, and going-concern issues). By establishing such a connection, standard setters would gain credibility by showing they’re working to address investor concerns to increase transparency, re-establish confidence in financial markets, and bolster investment.

Instead we find that current disclosure reform efforts — after the greatest financial crisis since the Great Depression — are more focused on reducing the quantity of disclosures rather than improving the quality of disclosures. This paradox grows when you compare current efforts to policymakers’ response to the Great Depression, which led to the passage of the Securities Acts and a substantial expansion in disclosures. Although the amount of financial reporting information available can be extensive, investors welcome useful information because they have the tools to assist them in managing the volume of data for their financial analysis.

To determine what investors believe standard setters should focus their efforts on to enhance financial reporting, we asked members to prioritize a variety of potential financial reporting initiatives. This revealed that what investors believe is important (emphasizing matters of importance during a reporting period and improved financial statement presentation) is diametrically opposed to where standard setters are currently focusing their efforts (developing a disclosure framework aimed at reducing the quantity of disclosures).Standard setters should, therefore, refocus their efforts to enhancing quality and transparency in the areas that investors see of greatest importance.

Our outreach to investors shows the most effective means of enhancing transparency would be for standard setters to prioritize certain financial reporting improvements. We believe these recommendations, in order of importance to investors, will go some way in addressing investor skepticism in financial reporting:

Financial Statement Presentation: Investors believe improved financial statement presentation is a key element to improving financial reporting because poor presentation limits transparency. Furthermore, disclosures are less effective when the underlying financial statements are not effective or when disclosures are meant to compensate for poor presentation.

Communication and Presentational Enhancements: Investors and financial statement preparers can find common ground in enhancing communication style and presentational changes to make information more digestible and effective in communicating the company’s results.

Most Troublesome Disclosures: The most challenging aspect of effective disclosures resides in communicating the judgments and estimates made in preparing the financial statements; providing a clear and complete picture of economic assets and obligations not included in the financial statements; and conveying the risks associated with the business. The 2008 financial crisis highlighted these as the most troublesome disclosures for investors. We underscore the importance of improving disclosures in these areas. And when necessary, preparers and auditors should go beyond required disclosures to provide investors with a complete understanding of the underlying economic effects of transactions and account balances.

Key Considerations for Standard Setters and Policymakers: The report also covers matters standard setters will need to consider — including materiality, technology, making effective cost-benefit analyses, and evaluating underlying behavioral elements — as part of any decision-making process to improve disclosures.

Disclosure Framework: Although investors support developing a disclosure framework, the majority of our survey respondents believe other financial reporting reforms are of greater priority, as outlined above. Adopting these recommendations would lead to substantial progress in financial reporting, creating less of a need for a disclosure framework.

Research had prove that disclosure isn´t effective. Better policy is create mechanisms that can recall for moral of the agent just in the moment previous to a deal/sign a contract. Studies demostrate that disclosure lead to a scenario in wich the two sides (cliente and agent) make discount at the moment later to the disclosure and that the discount make for the client is smaller that the overvaluation that is give it for the agent. A mechanism that recall for moral of the person(agent) is more effective in diminishing the tendency to cheat.

European regulators, including Belgium's Financial Services and Markets Authority, are calling for banks to give more short-term voluntary support to the Euribor swaps market benchmark, which faces an overhaul. The panel of banks that contributes to setting the benchmark has fallen from 49 to 20, and regulators say they have contacted banks and asked them to return to participation, with the possibility of making their contribution mandatory being held back as a last resort. Risk (subscription required) (16 Aug.)

Investigations into potential insider trading by Deutsche Boerse CEO Carsten Kengeter have expanded to look into the "reliability" of the exchange's top management. Financial Times (tiered subscription model) (16 Aug.)

President Donald Trump has dissolved two business councils after CEOs kept withdrawing to protest his comments about a deadly confrontation in Virginia. Eight executives of major companies left the American Manufacturing Council and the Strategic and Policy Forum. Reuters (17 Aug.)

CFA Institute is the global, not-for-profit association of investment professionals that awards the CFA® and CIPM® designations. We promote the highest ethical standards and offer a range of educational opportunities online and around the world.

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.